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Saturday, February 4, 2012

So you wanna... buy a HDB [part 1]

Buying a new home is considered a milestone for many Singaporeans. For most, it would mean buying a HDB flat. We have seen the prices of HDB flats rose drastically in the past few years.

As buying a new flat is a huge topic, I will be splitting up the topic over a few posts as I gather more information on this. This post will focus on the prices of HDB flats and the loan repayment amounts.

If you qualify under to buy an new Build to order (BTO) flat from HDB, the prices you are looking at will be significantly lower. You will however need to wait around 3 years before the flat is build and ready for you to live in.

Most people I talked to prefer getting a 4 room flat. A 4 room flat will have 3 bed rooms and is suitable for a typical family with 2 children to live in. Depending on the location of the flat, it can even go up to 300k or more.

For those who are not eligible to buy a BTO flat, they may have to consider buying an executive condominium, DBSS flat or even a resale flat. A resale flat will be much more expensive (can go up to 800k in some instances) and will normally come with a hefty "cash over valuation (COV)".

With such high prices, most Singaporeans will need to take up a housing loan to finance the housing. The current housing loan interest stands at 2.6%. At this interest rate, many people may start to wonder how much they will need to pay per month or if they can pay solely from their CPF OA?

Assuming a 30 year loan, the monthly repayment amount and the total paid amounts are as follows:

Loan

Monthly payment

est total paid

200,000

801

288,360

300,000

1,202

432,720

400,000

1,602

576,720

500,000

2,002

720,720

600,000

2,403

865,080

700,000

2,803

1,009,080

800,000

3,203

1,153,080

900,000

3,604

1,297,440

1,000,000

4,004

1,441,440

A few points to note about these numbers:

1) If you choose to service the loan over 30 years, you end up paying about 44% more than your original loan amount

2) For every 100k increase in the loan, there is about a $400 increase in the monthly repayment.

3) For a 500k loan, you will need to repay $2002 per month. This is a critical point. Assuming a pay of $5000 or more, you would be paying the maximum sum for the CPF contributions. Along with the 16% employer contribution. The monthly contribution comes up to $1800. Of which, depending on your age, it is divided into different proportion to your OA, SA and MA [http://mycpf.cpf.gov.sg/Employers/Gen-Info/cpf-Contri/ContriRa.htm] [see table below]

For young couples below the age of 35 with a monthly pay of 5k or more, the OA contribution will come to about $1150 (23/36*1800) per person. This will mean that

a) Until they hit 45, they would be paying with almost all their CPF OA contributions

b) From the age of 45 onwards, as OA contributions will reduce to a point where they can no longer rely on the CPF OA alone to repay the loans. This means that they would need to fork out cash monthly to repay the loans. This cash amount will increase as they move to a different age band with a even lower OA contribution rate. At the age of 50, the maximum CPF contribution rate towards OA will be $650 (13/30*1500)

With this, if housing prices continue to increase, many couples will find themselves with very little CPF OA balances left by the time they retire. They will probably need to depend on their SA balances to hit the CPF minimum sum. Which is why I have been emphasizing the importance to plan one's retirement without the CPF in the picture.

Looking at all these numbers, are you worried now?

As a single who probably can only buy a resale flat at exorbitant prices in a few years time, I am very worried. =(